W.R. Grace Emerging from 12-Year Bankruptcy Protection
January 9, 2014
One of the longest-running bankruptcy proceedings in U.S. history is winding down after 12 years.
Asbestos-laced dust from the vermiculite mine owned by W.R. Grace & Co. contaminated properties and injured thousands of people in and around Libby, Montana from 1963 to 1990, when the mill shut down. After generating billions in asbestos liabilities and more than 65,000 lawsuits involving almost 130,000 claimants, Grace sought Chapter 11 bankruptcy protection in 2001.
As part of its reorganization plan, the Maryland-based chemical company agreed to fund two bankruptcy trusts to compensate property owners and asbestos victims.
Nearly two years ago, a federal bankruptcy court approved the bankruptcy reorganization plan. But the bankruptcy proceedings have dragged on while the company attempted to settle appeals filed by some of its pre-bankruptcy creditors. In December, W.R. Grace announced a $129 million agreement to settle the last remaining appeal.
If a federal court approves the settlement, Grace could emerge from bankruptcy before February.
Company Thrived During Bankruptcy
Like many companies with huge asbestos liabilities, Grace took advantage of a special provision of the U.S. Bankruptcy Code that allows certain asbestos lawsuit defendants to seek protection from further litigation. Under the provision, the federal court can “press pause” and halt lawsuits if a company agrees to fund a trust to compensate current and future asbestos victims.
Asbestos victim advocates have welcomed the trust system as a way to ensure that future victims can receive at least some compensation from companies that might have otherwise folded before being able to compensate their victims. But asbestos victims aren’t the only ones who have responded favorably to the asbestos trust system. Companies like Grace have been able to thrive while going through bankruptcy reorganization.
According to Reuters, Grace has been able to “pause debt repayments, survive two recessions and take advantage of [increased] demand for its fine powder catalysts, which help refiners process crude oil….” during the reorganization process.
Scott Baena, an attorney who helped negotiate settlements with Grace on behalf of Libby property owners, says that “Bankruptcy has been a great place [for Grace] to hide out.” During the three years leading up to March 2013, Grace stock more than tripled. The company also obtained new companies, including a $500 million deal to acquire a unit of Dow Chemical in December 2013.
But companies undergoing bankruptcy reorganization must answer to other parties, in addition to asbestos victims. They must also reach agreements to settle pre-bankruptcy debts with their creditors. Such creditors have input throughout the reorganization process. If they are unhappy with the plan approved by the court, they may be able to appeal the court’s decision.
In Grace’s case, the final appeal holding up its exit from bankruptcy involves a group of banks that claim the company owes $185 million in pre-bankruptcy debt. According to a filing by Grace with the U.S. Securities and Exchange Commission, it has agreed to pay the lenders $129 million, in addition to $971 million it has already agreed to pay under the reorganization plan. If the court agrees with the settlement, the lenders have agreed to withdraw their appeal, clearing the way for Grace to exit bankruptcy.
What the Exit Means for Victims
The process Grace used to mine vermiculite for use in insulation released asbestos fibers across Libby and surrounding areas. Claimants accused the company of not only failing to properly contain asbestos, but also concealing the dangers. They also alleged that Montana state officials failed to adequately monitor safety at the mine and warn residents about the asbestos risks.
Grace closed the mine in 1990. But thousands of people had already been injured and property owners had to deal with contaminated properties and declining property values.
Some Libby asbestos victims have already been awarded a $4 billion settlement for pre-bankruptcy litigation against Grace. In 2011, over 1,300 claimants reached a $43 million settlement with the state of Montana. The federal government has established programs to clean up asbestos contamination in the area and to provide ongoing medical monitoring to residents.
But hundreds of people have died from asbestos exposure in and around Libby and, many more are expected to develop serious asbestos-related injuries, like mesothelioma, for decades to come. Under the bankruptcy reorganization plan, Grace has agreed to fund an asbestos bankruptcy trust which will help compensate future personal injury claimants. The plan also establishes a trust that will compensate claims from property owners who have had to deal with damage from asbestos contamination from the mine and declining property values.
Grace and its largest creditor, head of Halcyon Asset Management, are optimistic about the settlement. According to a report by Financial Times, “the ability of W.R. Graceto emerge from bankruptcy benefits everyone with a stake in the company’s future.” To the extent that bankruptcy has ensured that future victims will receive at least some compensation for their injuries, victims may also view the bankruptcy reorganization favorably.
However, Financial Times has also reported the company believes it could have faced a “substantial number” of additional claims over the past 12 years if the court had not stayed litigation.